Among the more intriguing market developments of late has been the explosive growth of so-called special purpose acquisition companies, or SPACs. The SPAC is not new—it was conceived in the 1990s as a means for facilitating the launch of publicly traded companies. Other than just prior to the Global Financial Crisis in 2008, SPACs have been dormant as a corporate fundraising vehicle until the past year or so (as seen in the chart below). As the economy began emerging from the shutdowns in the spring of 2020, a combination of booming equity markets and pandemic-spurred innovation led to a resurgence in SPACs across many industries. In fact, last year more than 240 SPACs were launched, quadruple the number in 2019. In our view, this tremendous growth is a manifestation of a market bubble and while we are not investing in SPACs in client portfolios, it is helpful to understand them given their current prominence in the capital markets.
The Rise of SPACs
A SPAC is a shell corporation listed on a stock exchange with the sole purpose of acquiring a private company and then taking it public without going through the traditional initial public offering (IPO) process. Logistically, the SPAC files to go public on the stock exchange, in a more streamlined process than a privately operated business, largely because the financials of a SPAC are straightforward—the assets are cash—and the stated mission is simple. Since the SPAC is essentially cash at origin, with no underlying business on which to determine a valuation, the price at which the SPAC goes public is subjective. Meanwhile, the private business that ultimately becomes public as a result of merging with the SPAC is left to focus on its operations, skipping a good portion of the time and energy needed to craft detail-oriented disclosures that would normally be required of a private firm seeking an IPO. Whether the SPAC finds the operating business first, or vice versa, the same result occurs if they decide to combine: the SPAC spends the cash it raised and buys the private firm, and voila, that private firm becomes a public firm overnight. Richard Branson’s space travel venture Virgin Galactic, online gaming outlet DraftKings, and real estate marketplace Opendoor are just a few of the well-known companies that have recently traveled the SPAC path to public ownership.
Because SPAC investors do not know the ultimate company to be acquired by the SPAC, there are opportunities to decline participation in the acquisition and get their capital back. Still, this presents a speculative element for investors as the quicker “on-ramp to the highway” that SPACs can provide creates the possibility that the typical due diligence an underwriter would be required to furnish to the Securities and Exchange Commission (SEC) is simply not there.
It remains to be seen whether the sharp run-up in SPAC issuance will draw regulatory scrutiny relating to ensuring proper disclosures. In the meantime, watching the return of SPACs has been an interesting development in the capital markets. It is not a coincidence that the return of SPACs to prominence coincides with increased speculation in the current equity markets. Thus, while we do not intend to invest in SPACs in client portfolios, we are keeping our eyes on the deals that are being consummated and the implications of their explosive growth.
Last Updated: April 1, 2021
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